Stock sale brother sister

[pjb1835]

One of 2 brother/sister companies covered under one 401k was purchased.  Buyer already has a plan and doesn't wish to merge or transfer and only wants one plan post acquisition.  Does entire brother/sister plan have to be terminated before acquisition to avoid the successor plan rule issues? Should they separate into 2 plans and then terminate the soon to be acquired company's 401k before acquisition?  

[Luke Bailey]

pjb1835, of course I don't know your detailed facts, haven't reviewed your plan or acquisition documents, etc., and therefore cannot address your specific situation, but speaking generally, if one company buys stock in second company in a way that takes that second company out of a controlled group relationship that it previously had with a third company, the employees of the second company are no longer employed by the controlled group employer that maintained the plan. Thus, under Treas. reg. 1.401(k)-1(d)(2), there should be a controlled group. But check carefully the plan's definition of employer, eligible employees, etc. You may need, for example, to have corporate resolutions of the second company specifically stating that it will cease to sponsor the plan once leaves controlled group.

[pjb1835]

I guess Im asking what is the definition of a subsidiary that is described in GCM 39824 that allows severance?  Would a stock sale of a co in controlled group related due to common owners be considered a subsidiary spinoff?

[Luke Bailey]

If memory serves me correctly, pjb 1835, the reg provision that I cited was adopted well after the GCM that you cite, and is specific to k plans. I think you have to apply its general principles regarding definition of "employer." Good luck.